The EU should abandon a one-size-fits-all mentality to ensure a diverse banking market by setting proportionate regulation and encouraging innovation, says Chris de Noose of the European Savings and Retail Banking Group.

The UK referendum vote to leave the EU on June 23 sent shockwaves across the UK, Europe and the world.

For many hundreds of European savings and retail banks, the referendum made us pause and think about the role we play as locally focused banks that convert deposits from households, public bodies and small and medium-sized enterprises (SMEs) into loans for the job-creating real economy. Part of a diverse banking landscape, it is a unique model compared with the banks who seek funding primarily through the markets.

The backlash in the UK made us more convinced than ever of the need for EU policy-making that better reflects the diverse nature of the banking landscape. It also made clear the need to beef up the member states’ role versus the increasingly heavyweight EU institutions such as the European Commission and European Parliament.

The mindset of policy-makers and regulators also needs to change. Throwing out the ‘one-size-fits-all’ policy playbook and shifting towards the principle of proportionality would help. When these elements take hold, a diverse and innovative banking landscape thrives and serves society better.

A case for diversity

For banks and policy-makers, diversity means many things. First, a healthy level of competition within the overall banking system. Second, a banking market that stays leaner and meaner and shows greater resistance to financial shocks. Third, it means the savings and retail banking model continues to play an essential role within the banking mix. Built on trust and being really close to customers, savings and retail banks are called on by 40% of all Europeans every day – in rural areas, in the heart of a metropolis or anywhere in between.

The European Savings and Retail Banking Group sees diversity also taking on a new dimension as the digital revolution takes hold. EU policy should aim to boost innovation, not hamper it.

A diverse, single market for Europe should adhere to subsidiarity, and Brussels parlance that describes EU action occurring only when an EU member state cannot sufficiently do so. Criticised as ambiguous, subsidiarity means decisions made at the ‘lowest’ or least centralised level of ‘competent authority’. Fears have boiled over, however, that power has veered to EU bodies in Brussels and Strasbourg, which subsidiarity can help address. Restoring the balance with member states could help quell citizen angst.

Consistent policy goals also remain a challenge for EU policy-makers. That is where the principle of proportionality can work. A mindset that forces policy-makers to balance the costs and benefits of regulation, proportionality is reflected in more recent legislation. But so much more can be done.

One stark example is how the EU call for more growth and jobs from the real economy is undercut by a recent wave of regulation, which suppresses locally focused banks’ appetite to lend.

There is real need for current and new legislation to be applied in a proportionate way to all financial institutions, taking into account their size, complexity and the type of business model they follow. Each piece of legislation should be assessed on a case-by-case basis, as no simple set of criteria can be used to apply the proportionality principle. Locally focused and less complex financial institutions need to provide bespoke services in regions where they operate.

We have seen some progress on this front, but more must be done. The principle could also be better applied to supervisory reporting. 

Better coordination

Europe’s future hinges on honest debate firmly anchored on how well member states and their citizens actively help to decide how the EU is to evolve in future. The EU is the essential framework to help savings and retail banks nourish real-economy SMEs and households.

Despite the recent bump in the road, the European project should continue on a path of further integration. It is in the self interest of the 27 remaining member states, and the savings and retail banks residing and serving within them. The trick will be, however, to integrate better by setting proportionate regulation, boosting the member states’ role, and promoting a diverse banking landscape. The sooner, the better.

Chris De Noose is managing director of Brussels-based European Savings and Retail Banking Group.

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